Indian GDP to contract 7.8% in FY21, forecasts Icra

Demand and economic activity would pick up, said the agency based on a better performing agriculture sector and an approaching Covid-19 vaccine

Domestic rating agency Icra Ratings expects the technical recession in the country's economy to end in the fourth quarter of the current fiscal, limiting the contraction in the GDP to 7.8 per cent in the financial year 2021.

In the second quarter of financial year 2021, GDP contracted 7.5 per cent as against a decline of 23.9 per cent in the April-June quarter.

With a steady performance of the agricultural sector and a lagged recovery in the contact-intensive parts of the services sector, the agency forecasts a small contraction of one per cent in the Indian GDP in the third quarter of financial year 2021.

The rating agency's Principal economist Aditi Nayar said healthy procurement and a favourable outlook for the rabi season, as well as greater visibility of an approaching Covid-19 vaccine rollout, will strengthen demand and economic activity in the fourth quarter of financial year 2021.

“The technical recession is likely to end in that quarter (Q4), with a muted 1.3 per cent growth benefiting from a real recovery as well as the low base effect. This is expected to limit the contraction in Indian GDP in real terms to 7.8 per cent in FY2021,” Nayar said in a report.

After the NSO had released the GDP data for the second quarter in financial year 2021, the rating agency had projected the GDP contraction in financial year 21 to range between 7-9 per cent.

With the updated projections for Q3 and Q4 financial year 2021, it has now pegged GDP contraction in financial year 2021 at 7.8 per cent.

Nayar further said the spending seen during the festive season was driven by pent-up demand, and consumption is yet to fully stabilise in various sectors.

“While many indicators have displayed growth in the ongoing quarter relative to a weak performance in the same period in FY2020, volumes still remain below FY2019 levels in a number of sectors, highlighting that a full recovery remains somewhat distant,” she said.

The rating agency said that supply-side and logistical disruptions have re-emerged in some states. Further, the tailwinds of low commodity prices are turning into headwinds, as the visibility of vaccine availability is now pushing up global commodity prices, it said.

Nayar said exports, which faltered in the third quarter of financial year 2021, given the renewed restrictions in many key trading partners and logistical constraints, may revive modestly in Q4 financial year 2021, as the vaccine rollout gathers traction.

A pick-up in revenue visibility is expected to boost the spending of the government in the rest of this fiscal, she added.

Private sector investment activity may gather some pace in certain sectors but may not revive in a broad-based manner this fiscal, Nayar noted.